ECB Agenda Tests Central Bank Extremes in Denmark: Nordic Credit

The central bank in Copenhagen, which uses rates to defend
the krone’s peg to the euro, has left its deposit rate below
zero since July to fend off a capital influx into its AAA
markets. Denmark’s deposit rate is minus 0.1 percent and the
benchmark lending rate 0.3 percent. The quarter point rate cut
to 0.5 percent delivered by the ECB could trigger an equivalent
cut today in Denmark’s lending rate, according to Danske Bank
A/S and Jyske Bank A/S.

“We are in unknown territory,” Niels Roenholt, a senior
economist at Jyske Bank, said in a phone interview. “This time
around it’s a little tricky.”

Jyske says there’s a chance the central bank may do nothing
rather than risk using up all its ammunition, while Danske says
a 15 basis point cut is also possible. Danish policy makers have
resorted to unprecedented easing to prevent the krone
strengthening beyond the limits of its peg. Fiscal restraint has
left Denmark a haven from the debt crisis in southern Europe,
driving down the Nordic nation’s bond yields.

Relative Yields

The low rates have taken their toll on Denmark’s financial
industry. Danske Bank said today net interest income dropped 3.5
percent last quarter from a year earlier. Even an increase in
market share and the “positive effect” of pricing failed to
offset the impact of lower interest rates, Danske Bank said.

“We are gradually financially putting the crisis behind
us,” Chief Financial Officer Henrik Ramlau-Hansen said today in
an interview. “But we are also suffering from the very low
level of interest rates, which are hitting our deposit
margins.”

“The room to maneuver isn’t as big for Denmark, so the
Danish central bank has to be more careful in following the
ECB,” Klaus Rasmussen, chief economist at the Confederation of
Danish Industry, said in an interview. “A lending rate of zero
would be hard to believe. It has to be a little bit over zero.”

Currency Reserves

Rasmussen predicts Denmark’s central bank will cut its
benchmark rate by less than the 25 basis points he expects the
ECB to ease by.

The krone traded as strong as 7.4553 against the euro
yesterday, versus the central bank’s targeted rate of 7.46038.
The Danish currency was as strong as 7.4306 per euro in May last
year and as weak as 7.4633 in January. Foreign currency reserves
reached a high of 514.4 billion kroner ($91 billion) in August
and have since declined to 481.9 billion kroner in March,
central bank data show.

Denmark is unlikely to cut its deposit rate further, based
on an assumption the ECB will leave its deposit rate unchanged
at zero, according to Lars Rasmussen, a senior analyst at Danske
Bank Markets. According to Jacob Graven at Sydbank A/S, Danish
policy makers may decide not to cut either the deposit or
lending rate. Such a step would be “quite unusual” given the
bank’s history of following the ECB, he said.

Overnight Accounts

The bank doesn’t hold scheduled meetings and only adjusts
rates to defend the currency peg. It last raised rates in
January by 10 basis points after signs of improvement in the
euro area triggered a sell-off of haven assets. To counter the
impact of its negative deposit rate on the financial industry,
the central bank has raised the cap on overnight accounts, which
offer a zero interest rate.

Though the central bank’s policy mandate doesn’t give it
scope to respond to demand in the economy, the nation’s haven
status has resulted in record low borrowing costs that are
underpinning consumer demand.

The government of Prime Minister Helle Thorning-Schmidt has
rejected calls to increase stimulus measures, arguing instead
budget discipline will support Denmark’s haven status, keep
borrowing costs low and deliver indirect monetary support to the
economy.

“We will not leave a mountain of debt for coming
generations,” Economy Minister Margrethe Vestager said this
week.

Mortgage Effect

Denmark’s record-low rates have carried over to the
nation’s $550 billion bond-backed mortgage system -- the world’s
biggest on a per capita basis. The yield on the Nykredit 2
percent mortgage note due April 2014 eased to 0.29 percent
yesterday, from 0.84 percent a year earlier, according to data
compiled by Bloomberg.

That’s helped the world’s most indebted households survive
a slump of more than 20 percent in property prices since their
2007 peak. Danes’ personal debt is 267.31 percent of income,
according to Eurostat data compiled by Bloomberg. By comparison,
Sweden’s ratio is 148.77, the Netherlands is 250.45, and the
U.S. is 93.87 percent.

Central bank Governor Lars Rohde said last month policy
makers seeking to fuel growth have pumped the financial system
with so much liquidity that an exit risks stunting a recovery
and bursting potential asset bubbles.

Crisis Support

For now, most indicators suggest the euro area still needs
crisis support measures. Euro-area unemployment hit 12.1 percent
in March, its highest on record. Denmark’s government this week
cut its economic growth forecast to 0.7 percent, while
economists at Danske Bank and Svenska Handelsbanken AB both
estimate Denmark probably slipped into a recession last quarter.

Monetary easing “will give a positive impulse to growth
all over Europe,” Rasmussen at the Confederation of Danish
Industry said. “It will feed into consumption, and it will also
help businesses.”

The Danish central bank has signaled reluctance to venture
further into negative rate territory.

“With low monetary policy interest rates, the room for
further reduction of Denmark’s Nationalbank’s lending rate is
limited,” the bank said in a website posting dated April 10.
“The lending rate will remain positive.”